Changes to Superannuation in Australia have a significant impact on estate planning, particularly for those who are close to retirement.

This year’s budget brought with it a range of proposed changes for the country’s superannuation scheme.
These changes are now legislated, and have significant impacts on estate planning strategies for people
now approaching retirement age. Depending on their current arrangements, they may want to consider
alternate methods of wealth preservation during this time if they have high superannuation balances.

What do the changes mean for estate planning?

Say you have two members in a super fund and they both have a balance of $1.2 million each.
Traditionally, we’d recommend the super fund trustees prepare a two-tiered binding nomination to the
effect that, if the first spouse passed away, their balance would be paid as a pension to the surviving
member. Then, when the surviving member passed away, those amounts would go either to their estate
or nominated beneficiaries.

The main problem this creates is that you’ve got a $1.6 million cap per member. The changes the
government has announced state that if you start a pension or death benefit pension for the surviving
member, that remaining $1.2 million gets added to their transfer balance cap. This means their total is
now $2.4 million, and they’re only allowed to pay a pension out of $1.6 million of that amount. There is
now $800,000 dollars of excess in their cap that they now have to manage.

The surviving member might have to wind back that $800,000 into accumulation phase or withdraw it
from the system entirely to ensure they stay within their allowed cap.

If your estate planning is relying on this strategy, it’s important to be aware of what the changes mean.
Alternatively, if you’re creating a new will or updating an existing one, it’s important to review your
superannuation plans and work out how they align with the changes and whether you can position your
money in a more tax effective manner.

How to reduce tax liability on death benefit payments

There are two components to a superannuation account balance. One is the taxable component, and
the other is the tax-free component. The taxable component is made up of amounts that have been
contributed to the fund over a person’s working life, where a tax deduction has been claimed on them,
and there are earnings on top of that amount.

If you make a contribution to super from after-tax money, that amount doesn’t get taxed by the fund, and
the amount is classified as a tax-free component. A benefit paid from a taxable component can, in some
circumstances, be subject to a 15 per cent death benefits tax. This occurs when the benefit is paid to, for
example, an adult child either directly or through an estate.

To avoid this, we encourage clients to take pension payments out of their fund and re-contribute them as
non-concessional contributions, essentially moving some money of the taxed component into the taxfree
component. This means that when a person passes, it reduces the liability to death benefits tax.

The changes impact the cash out and re-contribution strategy we encourage many of our clients to
pursue. It’s still a viable strategy, however the reduction of the non-concessional cap from $180,000 to
just $100,000 means it would take longer to achieve the same results.

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